The End of Hong Kong

By Paolo von Schirach

WASHINGTON – Hong Kong as we knew it –an island of economic (and at least to some extent) political freedom living a somewhat precarious, semi-independent existence as a special status appendage to mainland China– is now finished. China just killed it.

For a while, hesitation

A while back, confronted with the defiance of the Hong Kong citizens who were protesting almost daily, desperately clinging to the hope that somehow they would be able to preserve their exceptional autonomous status indefinitely, (or at least for a much longer period of time), the Chinese government hesitated. It allowed loud and at times violent protests that would be simply unimaginable in the mainland.

New course

But now the leaders in Beijing changed course –in a dramatic way. They made what is clearly an irreversible decision regarding ways to put an end to Hong Kong’s open rebellion. A Chinese national security law will be applied to Hong Kong. Along with this momentous decision, comes a simple message. From now on, the recalcitrant trouble makers in Hong Kong will be arrested and punished, harshly. All the others are on notice. Hong Kong will be tamed, with force. And, if this tough Beijing approach to a territory that is supposed to enjoy special autonomies for many more years looks bad in front of world public opinion, so be it.

Chinese pragmatism?

If we step back, the world used to view China’s willingness to accept that Hong Kong, as of 1997 a territory under its sovereignty, would continue to operate according to vastly different (Western) principles of economic and to some extent political freedom (the legacy of British rule) as a sign of reassuring Chinese enlightened pragmatism.

Well, it turns out that China now decided that Hong Kong is too big of a problem, and therefore it must come under full mainland control. The massive demonstrations organized by those who feared that this development might come about –Chinese direct control– somewhat predictably, triggered this very outcome. Henceforth, a national security law from mainland China will be applied to Hong Kong. Therefore, no more Hong Kong special status. Everybody take notice: this is the beginning of the end, in fact the end, of any residual meaningful autonomy and related freedoms inherited by the Hong Kong citizens from British rule that were supposed to be preserved for many more years, based on the handover accords between China and Great Britain.

The end of Hong Kong

Of course, this also means that any hope for Hong Kong’s continuing viability as a vibrant global financial and trade hub, sustained by its special status and related freedoms as a territory that is in essence a free appendage to autocratic China, is now gone.

Make no mistakes. With this open assertion of Chinese power over the territory, Hong Kong is finished –politically and economically. Most fundamentally, this move by Beijing also spells out that China does not have any problems in contravening both the spirit and the letter of the 1984 Sino-British Joint Declaration which explicitly stipulated that Hong Kong would retain its distinctive system and laws for 50 years after the 1997 end of British colonial rule. So, we have to conclude that, according to Beijing, international commitments are binding until they are not, based on its discretion.

How is this possible?

Many observers may argue that there must be some mistake here. This dire scenario cannot be true. Why would China kill Hong Kong, the goose that lays so many golden eggs? Along with the stick of this tough new national security law, surely there must a carrot somewhere. There must be some compromise offer coming from Beijing, some new arrangement that will preserve Hong Kong’s status as a vibrant global trade and financial hub. Hong Kong, the optimists would say, plays a really unique role. It is too valuable to China. As a minimum, it performs a useful role as an open western-style gate linking China’s opaque economy to the free trading world. Why would China destroy this tool?

Hong Kong no longer so important for China

For two reasons. Reason number one. China concluded that tolerating open defiance from some of its subjects is bad for the image of the ruling Communist Party that is supposed to be in control of everything. Yes, there may be some flexibility regarding special situations, (and Hong Kong would be one of them), but only as long as there is complete understanding that on fundamental matters there must be total compliance with the dictates coming from Beijing. Clearly, a large portion of Hong Kong’s citizens do not agree with this understanding. Hence their defiance expressed via protests. And now Beijing tells them and the world that enough is enough. Open defiance will be crushed.

Reason number two, Beijing’s leaders must have concluded that the tremendous growth of the Chinese economy in the last thirty years over time reduced the strategic relevance of Hong Kong as a precious bridge to the West. China obviously concluded that, while this loss is regrettable, it is no longer that significant.

What about the damage to China’s image around the world?

But here is the open question. Will Beijing come to regret this choice? Have the Communist Party leaders in Beijing fully assessed the damage to China’s image and prestige around the world? Don’t they see that international public opinion, already suspicious about China’s behavior, will become even more skeptical about the notion that China has become a responsible global citizen?

In Hong Kong, at this point the people do not need additional evidence to be convinced that they are doomed. Clearly the Hong Kong business elites, as well as the ordinary citizens, see the full implications of the new national security law. And the global companies that have been operating in Hong Kong because of its special status that granted western-style freedoms, and because of its unique role as a regional hub and as the intermediary between global business and mainland China, see this as well. Once it becomes clear to all global investors that going forward Beijing will run the place at every level, and that the local government no longer matters, this will spell the end of Hong Kong’s as a vital economy. Therefore, we can expect to see an exodus. may be not a stampede, but an exodus out of Hong Kong.

People will leave

We know that the British government already offered to those Hong Kong citizens who are so entitled (about 3 million) to relocate to the United Kingdom. Expect many of them to take advantage of the offer. Others will try to follow them, and/or try to go somewhere else: be it Taiwan, Singapore, Australia, Canada, or the US. The smart and wealthy most probably already have contingency plans in place, (second passports, investor visa and property in other countries), that will soon be activated.

The logical consequence of all this is that in a not so distance future Hong Kong will become something like a ghost town. Not literally, of course, but in practice. The vital juices of the former British Colony are kept flowing by the tens of thousands of entrepreneurs who run large and medium local businesses that have prospered because their owners had the confidence of living under a regime of significant personal and economic freedom. If this regime is indeed over, and my sense is that it is over, then Hong Kong as we know it is over.

Miscalculation?

The Chinese government obviously factored all this before declaring that its national security law now will be enforced in the Territory. However, I am not sure that they have fully evaluated the ripple effects, the long term consequences of what they are doing today. As indicated above, I am sure they evaluated the economic pros and cons and concluded that, with a much bigger and much more sophisticated mainland China economy, Hong Kong’s role is no longer that important for China’s growth and welfare. Therefore its loss as a hub for global finance and trade is really not such a big deal. Shanghai can replace it. And that may very well be true. However, and here is Beijing’s miscalculation born out of hubris, in so doing the ruling Chinese Communist Party is also showing the world what China is all about.

The true face of China

Now it comes out in the open that, when dealing with China, there are no nuances, and no special considerations. In this new world, as defined by Beijing, there is rising China’s power. The others have a choice to be either compliant vassals, or opponents. Noisy opponents will be dealt with using whatever means may be available until they accept their role as vassals.

Hong Kong is obviously a special case, with unique features. It has a special history. After 1997 it became legally part of China. Yes, we know that. Yet, precisely because of Hong Kong’s unique history and features, it was pointed out by the optimists outside of China as a good and reassuring example of Chinese wise pragmatism, suggesting that there will always be the possibility of mutually satisfactory agreements with a Chinese government deep down committed to further global progress through a variety of deals with its partners around the world. You know: “Live and let live”. “No matter what, we can find a productive way to get along”.

Well, not so. The deal made with the UK back in 1984, way before the Territory was handed over to China, guaranteed that Hong Kong would enjoy its special status for at least 50 years after China would regain sovereignty over the Colony in 1997. That deal has now been broken. Hong Kong’s protesters will be silenced. Many will go to jail. The lucky ones will escape or learn to be quiet.

Not like us

Sadly, Hong Kong is over. And now the world will look at China with different eyes. This turn of events will not benefit China’s image and prestige at all. Finally the world, in particular the rather absent minded, wishful thinking old democracies, will come to the realization that getting close to China under the assumption that “the Chinese have become more ot less like us” was and is a mistake.

Paolo von Schirach is the Editor of the Schirach Report He is the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




True Globalization Must Rest On Shared Values

By Paolo von Schirach –

WASHINGTON – The globalization we know has been driven primarily by the explosion of new cross border business opportunities created by truly disruptive technological innovation. Almost overnight, broadband internet (enabled by a robust global network of fiber optic cables) created a new, zero-cost modality to communicate and share enormous amount of data across the globe.

Moving goods became easy

When it came to transporting physical goods, the standardization of shipping technologies –same containers, same container ships, same container handling facilities used by all trading nations– accompanied by super efficient IT systems for managing and tracking millions of items in real time, made all this possible. Add to the mix huge infrastructure modernization (new rail freight lines, new highways, new airports, new ports) in major new industrial countries like China and we see the contours of the enabling environment for globalization.

Complex international supply chains that in most cases optimized results while reducing costs came to life. Combined with the outsourcing of labor intensive production from the US, Europe and Japan to low labor cost countries, they further contributed to the optimization of production, higher profits for many corporations, and lower prices for millions of Western consumers.

Not just about technology

We know all that. But here is the problem. Globalization should not be only about the successful adoption of new technologies that greatly facilitate cross border economic activities. Globalized business activities should take place within a global environment in which all the players sincerely adhere to the same rules, inspired by the same shared values.

And here is the problem. We do not have a robust rules based global environment in which norms are clearly and genuinely embraced by all participants, and serious penalties are imposed on rules-breakers by an impartial authority.

The World Trade Organization, WTO, may constitute an embryo of such an authority; but it is not the real thing. The WTO does not even come near to having anything close to the investigative and enforcement powers of a national government overseeing domestic commerce norms.

China not playing by the rules

There is no point here in repeating the long litany of complaints against Chinese behavior when it comes to international trade and investments. But it is worth noting that, for whatever reasons, the Western Nations that created the basic architecture of a rules based free trade system, while fully aware of Chinese non-compliance, for decades gave China a pass.

May be it was just wishful-thinking. However, for some reasons, after China entered the WTO, (December 11, 2001), most Western leaders concluded that China had turned a page. The leaders in Beijing were essentially done with the old command economy. They were eager to shed its legacy, while embracing Western style free trade, with all its rules. While China might take its time to fully become “one of us”, many observers had concluded that it was just a matter of time.

It did not happen

Well, now there is a growing consensus that that benign assessment had been not just premature, but flat wrong. Yes, there might have been a time, especially during the 1990s, in which genuine reformists within China had tried to articulate a new agenda aimed at turning the country into something close to a free market economy.

However, the elevation to supreme and now absolute power of President Xi Jingpin in 2012 finally convinced even the most optimistic analysts that this benign transformation within China, which would include its genuine acceptance of the Western rules based system it entered in 2001, is simply not going to happen. On the contrary, the signals from Beijing are that China has the ambition to create a new China-centric world order in which regional powers and others would follow a Chinese inspired and led international trade system. If we take these plans seriously, then we realize that the problem is not that China wants to be a stronger competitor within the existing system. China wants to create a new and improved system fashioned according to Chinese principles and “sell” it to the world as a better alternative to what the West created over time, after the end of WWII.

Be that as it may, and whatever your take on grandiose Chinese mega-projects like Belt and Road, it is clear that most of our benign assumptions regarding a Chinese progressive and indeed, inevitable, “conversion” to free market capitalism were out of place.

What’s next?

This being the case, what’s next? What should come next in the West is a genuine effort, hopefully led by an enlightened American Government, aimed at strengthening ties, at all levels, among all the capitalistic democracies, (The EU, Canada, Japan Australia, New Zealand and South Korea should be on top of this list), and other countries clearly willing to work within a rules based, free market international order.

This should not be about some kind of “Cold War 2.0” with China. But it should be about being inspired by the principle that, at least in general, it is better to do business with countries that share your values.

By refocusing its efforts, at the same time the West would send a powerful yet very simple message to China. The world operates according to principles of fairness, compliance, reciprocity and transparency. If China were genuinely willing to play by these rules, then they are welcome. There would be no issues. But the burden is on Beijing to show, through actual performance over time, its genuine commitment to the rules based system it seemed to have embraced about 20 years ago when it joined the WTO. Until then, the Western approach to trade and investments with China should be inspired by utmost caution and prudence. Assuming that “they are just like us” is a bad starting point. They are not like us.

Western principles

In the Western world the assumption used to be that more widespread prosperity is the outcome of innovation and increased levels of economic activity. In turn, innovation, enterprise and trade are made possible by the existence of political and economic freedoms protected and upheld by freely elected governments via the enforcement of sensible rules aimed at protecting the integrity, fairness and transparency of all economic activities.

I strongly believe that it is about time to forcefully reaffirm these principles, both domestically and in all matters related to international trade and investments. And there is no better way to do so than by establishing win-win international trade agreements with like minded partners, based on fairness, true reciprocity and therefore mutual advantages.

Do business with like minded people

A few years ago (beginning in 2013), there was a great deal of talk of a major US-European Union Free Trade Agreement, known as The Transatlantic Trade and Investment Partnership (T-TIP) that would greatly incentivize economic, trade and investment relations between the two sides of the Atlantic. Here is how the website of USTR (United States Trade Representative) described it:

The Transatlantic Trade and Investment Partnership (T-TIP) is an ambitious, comprehensive, and high-standard trade and investment agreement being negotiated between the United States and the European Union (EU). T-TIP will help unlock opportunity for American families, workers, businesses, farmers and ranchers through increased access to European markets for Made-in-America goods and services. This will help to promote U.S. international competitiveness, jobs and growth.

The U.S. and EU economies are two of the most modern, most developed, and most committed to high standards of consumer protection in the world.  T-TIP aims to bolster that already strong relationship in a way that will help boost economic growth and add to the more than 13 million American and EU jobs already supported by transatlantic trade and investment. T-TIP will be a cutting edge agreement aimed at providing greater compatibility and transparency in trade and investment regulation, while maintaining high levels of health, safety, and environmental protection. T-TIP presents an extraordinary opportunity to strengthen the bond between vital strategic and economic partners. [Bold added]

As you can see, the US Government at the time believed that this agreement would be extremely beneficial for both the US and the European Union. It also affirmed that enhanced economic ties would “strengthen the bond between vital strategic and economic partners.” Negotiations began during the Obama administration, but then it all fizzled after the elections of 2016, because of President Trump’s lack of interest in any new international trade agreements.

It is still possible to negotiate free trade with Europe

Well, assuming a relatively quick end to the current coronavirus global emergency, and a new US administration sincerely interested in both affirming and strengthening a rules based global commerce regime, a good place to start would be an ambitious plan to harmonize the myriad of rules that create de facto impediments to the free flow of goods –and especially services– between the US and the EU. If you consider that the US and the EU together represent the majority of world trade, the impact of a truly liberalized regime for trade and investments between these two giants would be revolutionary, with significant, world wide benefits.

Show the vitality of the Western world and its values

Western Europe and the United States are the two historic pillars of Western Civilization. While some believe that the West is well on its way to inevitable decline, there is no law of physics that establishes this.

An invigorated transatlantic trade and investment regime would act as a powerful tonic. It would open up new opportunities in the US and in Europe. It would strengthen ties among like minded societies. It would spur new joint ventures and mutually advantageous cross pollinations, while opening new avenues for cooperation at multiple levels.

But, more than anything else, a successful agreement that creates real value for all the stakeholders would show that like minded governments, inspired by the same or at least very similar values, can and will cooperate for the benefit of their societies.

Given the enormous amount of technical issues involved, this goal of a Transatlantic Free Trade Area may be very difficult to reach. But it is doable. The benefits, on both sides of the Atlantic, will be immense. And this agreement would be a powerful example of values-driven globalization.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




US Response to Coronavirus Dictated by Panic, Not Policy

By Paolo von Schirach –

WASHINGTON – Nobody is prescient. No one could have foreseen the timing and the extent of the coronavirus pandemic explosion which originated in China and then from there spread all over the world. However, as I noted elsewhere, the US was especially vulnerable, because it was utterly unprepared to meet any public health emergency.

No systems, no plans

Amazing but true, America had no “pandemic early warning system” in place so that a timely alarm could be sounded, nor did America have any meaningful public health “rapid reaction force” in place that could have been activated after the alarm had been sounded, in order to deploy all the necessary medical equipment and other materials where mostly needed, while ordering and enforcing the necessary contagion prevention measures, (immediate widespread testing, quarantines, social distancing, and lock downs).

True, eventually some of these measures were ordered and implemented here in the US. But, lacking anything even resembling a master plan, all this was done very late, and in a horribly inefficient, fragmented fashion, in a climate of confusion, disorientation and –at times– sheer panic.

Panic led to an extreme response

And the panic created by a disease with no cure and catastrophic predictions about millions of dead Americans, unless we closed everything down, led to the fateful decision to shut the country down, with full knowledge of the incredible damage to the economy that this decision would imply, including a slew of bankruptcies, and tens of millions of suddenly unemployed workers.

Let me make this clear. It did not have to be this way. We closed America down because, at the time, with no deployable countermeasures available and a deadly disease spreading rapidly, there seemed to be no other viable choice, if the main goal was to save American lives.

And, again, there was no other practical choice because the US had no deployable countermeasures, no contagion mitigation systems that could be activated. Here is the sad truth. When coronavirus arrived, America was literally a sitting duck, completely unprepared and therefore defenseless.

Amazingly, this means that America, the world’s leading economic power, leader in medical research and information technology, had not thought that a pandemic could occur here, and therefore had done essentially nothing to prepare for it. As a result, when coronavirus hit, the US had no workable tools to slow down the advancing pandemic, except for quarantines and lockdowns — public health countermeasures first deployed in Europe in the Middle Ages, at a time in which public officials literally had no other remedies.

Taiwan, South Korea and Germany had systems

In contrast, other governments over time had developed pandemic preparedness plans, and they activated them –immediately, as soon as news of the pandemic originating in Wuhan, China spread.

In Taiwan the government had a system in place (created in the aftermath of the SARS pandemic in 2003) that was immediately set into action when the Taipei government realized that something bad was happening in China, back in December 2019.

In South Korea, almost overnight, the government deployed a robust virus containment strategy based on massive testing and subsequent isolation of all positive individuals.

In Germany, a national and regional network of testing facilities sprang into action, almost immediately. As a result, Germany, to date, has by far the lowest number of fatalities per unit of population compared to the rest of Europe.

Because they had robust and tested “damage limitation strategies”, these countries had tools to limit contagion. Their number of fatalities is quite low, despite no cure and no vaccine. Which is to say that, unlike the US, other governments had thought about the possibility of a pandemic and had therefore funded and put in place policies and countermeasures that helped them contain the damage. If they could do this, so could we. The fact that we did not is a huge stain on America, the country that is supposedly ahead of everyone in innovation, science and high tech.

Early warning system would have contained the pandemic

Let me be clear. A US early warning system would not –I repeat, would not– have prevented this virus for which there is no cure from reaching the US and infecting people. However, a sophisticated early warning system, (which includes the ability to learn as early as possible about an unfolding epidemic anywhere in the world, and then quickly track and isolate positive individuals in order to prevent or at least slow down contagion), combined with prepositioned stockpiles of medical emergency material, (masks, protective gear, ventilators, field hospitals easily deployable by the military in high incidence localities), most certainly would have slowed down this pandemic, while reducing its spread and scope. Which is to say that, if America had had a robust pandemic plan in place, we could have avoided shutting down almost the entire economy, while probably saving thousands of lives, even in the absence of a cure or vaccine.

Millions of victims?

As we had none of the rapid reaction tools in place, overtaken by panic, federal and state policy-makers concluded that the only choice before them was between condemning literally millions of Americans to a certain death caused by an advancing coronavirus, or closing down almost the entire US economy in order to slow down contagions, this way preventing a horrible human tragedy. And so, lacking any plausible alternatives, Washington and most of the 50 States decided to literally close down the biggest economic power on Earth.

What is terribly wrong with this scenario is that this “either we kill people, or we kill the economy” choice could have been avoided by having a tried and tested contagion prevention national plan in place that would have worked like a very powerful shock absorber. This is what Taiwan, South Korea and Germany, among others, did –rather successfully.

Of course, as I said above, even if America had been properly organized to react to this pandemic, there would have been some contagion, many deaths, huge economic damage and enormous dislocation resulting in a recession. Hence the need for the US Government to intervene with emergency funds. But, for sure, both the economic dislocation and the emergency interventions would not have been on this scale, (almost three trillion dollars!), because the damage, while still very substantial, would have been far more limited.

Are we going to learn from this disaster?

I really hope we learnt our lessons here; even if at the cost of more than 50,000 lives, and counting; and close to three trillion dollars in emergency aid to corporations and individuals, and counting. I hope that by now our elected leaders have realized that the US cannot afford to have essentially no workable rapid reaction system in place when it comes to low probability but extremely high risk public health occurrences.

Of course, it will cost money to set up and maintain the necessary early warning and rapid reaction infrastructure, trained workforce and chain of command.

But this strategic investment will be only a fraction of the close to three trillion dollars we have already spent so far, not to mention the fact that early detection will give us the ability to save thousands of lives by preventing out of control contagion via timely quarantines and other targeted isolation measures.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




US Oil and Gas Sector Hit Hard By Virus, Price War

By Paolo von Schirach –

WASHINGTON – Sadly, coronavirus is here in America. All the restrictions announced and feared on most economic activities have created huge disruptions and panic. The entire travel, entertainment and restaurant industries are comatose. Airlines bookings literally collapsed. And now, with most economic activities frozen, there is widespread fear that this may be just the beginning of a massive health and economic crisis –with no timeline.

Even worse for the oil sector

Well, if things are looking ugly for the broader US economy, they are simply disastrous for the US fossil fuel industry, oil in particular. The global economic slowdown began in January when China literally closed down half of its economy. The consequent drop in oil demand from China depressed already low oil prices.

Very low oil prices mean that many low margin small and medium sized US oil companies will go bankrupt. And this is because their extracting costs are far higher than in Saudi Arabia or Russia. Many of them could barely stay alive with oil at $ 50 per barrel. But when crude prices went down from $ 60 to $ 30 the picture looked bleak. And now, with the new development of a price war between Russia and Saudi Arabia, expect oil (now at around $ 25) to go down to $ 20 per barrel, or even lower. What started as a crisis for the US energy sector in January, just turned into a nightmare.

The incredible impact of the US energy renaissance

Taking a broad view, there is no question that the US energy boom triggered by the 10 year old domestic “fracking revolution” is one of the brightest spots in the US economy. Thanks to fracking, in the space of almost nothing, America, assumed to have only small and rapidly declining reserves in both oil and gas, came back with a gigantic roar; all thanks to its ability to exploit vast amounts of oil and gas until recently deemed to be unrecoverable, due to the prohibitive cost of extraction.

Well, thanks to the revolutionary fracking technologies, unrecoverable oil and gas became recoverable. In just a few years, a large number of small and medium energy companies (Exxon Mobil and Chevron, among others came later) made the US into the world’s largest natural gas producer, and now the biggest oil producer. It is hard to overestimate the positive impact of all this.

New jobs and energy security

Just think about it. Nowadays, we have billions of dollars invested at home, in this dynamic domestic energy sector, instead of being sent out to buy OPEC oil. We also accomplished the creation of “Hemispheric Energy Security”.

To be clear, America is not totally energy independent. However, if you combine this staggering increase in domestic energy production with Canadian and Mexican imports, you realize that nowadays most of the energy Americans use every day originates from the Western Hemisphere. This is a huge net plus in terms of improved US energy security and therefore national security.

Problem: high cost

The big fly in the ointment in all this was and is that shale oil extraction is a high cost, low margin business. And this is a big problem. Indeed, mostly on account of a mature, abundantly supplied global energy market, crude prices are now historically low, while many if not most US players in this shale oil sector are over leveraged, while they do not make much money by selling oil at such low prices.

In fact, some do not make any money at all. Given relatively high operating costs, low oil prices and large debt burdens, the sheer survival of many American small and medium energy companies was highly questionable before the crisis of 2020 began. For these reasons, the energy sector was not very attractive to average investors. Indeed, even in the context of a very robust stock market in 2019, oil stocks were the worst performers.

Energy companies must be profitable

Yes, it is great to celebrate this astonishing American energy renaissance. However, this is a capitalistic economy. Eventually, you have to be profitable to stay in business. Of course, cost cutting and consolidation were happening in this rather fragmented industry, well before this most recent oil price collapse. And the sector proved to be much, much more resilient than what many critics had argued. Initially thought to be viable only with oil at $ 60 per barrel or above, many companies can still make money with oil at $ 50 or $ 40. However, some cannot.

The impact of the crisis in China

And then January 2020 came along, with the explosion of the coronavirus epidemic in China. This led to the freezing of the Chinese economy, and the consequent collapse of (already low) oil prices due to drastic demand cuts by its biggest customer. This was bad news for all oil producers and exporters; but really horrible news for the shale oil sector in the US that depends on relatively high crude prices (at least $ 50 per barrel on average) to stay profitable.

Saudi Russia price war

Well, if this were not bad enough, on the heels of the China problem came an unexpected price war between the two main world exporters: Saudi Arabia and Russia. They would not continue their cooperation based on agreed upon production cuts aimed at supporting global oil prices. In fact, with no deal, they decided to turn all the taps on, this way flooding an already over supplied oil market, with a consequent additional price drop.

Well, if oil at $ 40 per barrel was very bad news for many US shale oil producers, you can imagine the impact of oil at $ 25 per barrel, or lower. This is an unmitigated disaster, in the context of a suddenly deteriorated US and world economy.

If this oil price slump lasts much longer, you can expect many bankruptcies, and tens of thousands of American oil workers out of a job, with negative cascading effects on the hundreds of suppliers and vendors that depend heavily on vibrant energy companies buying pipes, drilling equipment, valves, pumps, and what not. Expect collapsed demand for all these oil services, parts and components companies. And, as a sad consequence of all this, expect additional misery and negative ripple effects on so many local economies that had done very well on account of the money brought in by the oil business.

Price war cannot last much longer

The only hope in all this is that this price war cannot last very long because it is unsustainable for both Saudi Arabia and Russia. Indeed, while both countries’ oil industries can still make money even at these extraordinarily low oil prices, both governments cannot afford this.

Russia based its spending plans on oil at $ 50 per barrel. Saudi Arabia needs oil at $ 80 to finance its rather ambitious economic diversification agenda. Here is the thing. Revenue generated by foreign oil sales is almost all these two countries got. Russia may be somewhat better placed, but is not in a great position.

US shale sector will take time to recover

Yes, for a while at least, both countries can dip into their dollar reserves to finance the cash shortfall caused by drastically reduced oil revenues. But not indefinitely. In all this, the US shale oil sector is getting hit pretty hard, because its operating costs are much higher than current oil prices.

No way that companies that need oil to be at $ 40 per barrel just to stay alive can keep going much longer with crude hovering around $ 20. In the end, the US shale sector will survive. But only after undergoing painful bankruptcies and consolidations after which only the fittest will make it.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




America Unprepared To Deal With A Pandemic

By Paolo von Schirach

WASHINGTON – For very understandable reasons, millions of Americans are now focused on the progress of the Wuhan coronavirus epidemic and on any assessments/prognostications about its virulence and ability to expand in a significant way beyond China.

Low threat

As of now, nothing much has happened in the US. The only known cases of coronavirus are related to very few individuals who contracted the disease while in Wuhan. In one case, the husband of a woman who got infected while visiting China got it from her after she returned. Not surprising.

So, no reason for panic, it seems.

Bad practices when it comes to basic hospital hygiene

True. for the moment at least, we are not facing any coronavirus emergency, here in the US. However, as some noted experts in epidemics have indicated, this potential crisis should be a wake up call to face the reality of the grossly inadequate prevention practices that prevail in most American hospitals.

When it comes to basic hygiene, most US health facilities do not follow elementary precautions, and so hospitals have become the breeding ground for viruses and deadly bacteria. It may sound crazy, but, according to the data, about 70,000 Americans die every year because of diseases contracted while in the hospital. And this –let me stress– occurs under “normal” circumstances, without the pressure and confusion caused by a sudden pandemic.

Tragic but preventable

Think of that. This is tragic. But almost completely preventable, assuming the adoption of and compliance with basic prevention and safety protocols. I have no idea as to why health authorities, hospital managers and other senior people in charge of medical care in America are not doing much to reverse this awful state of affairs.

This is not rocket science. This is about making sure that, while in the hospital, patients are properly isolated, so that they will not communicate potentially deadly pathogens to medical personnel and other patients. This is rather elementary. And yet, somehow, it is not done –at least not done on the scale that would be necessary.

For sure, adopting known best practices can be onerous, expensive, and time consuming. You have to create special “airtight” facilities within hospitals. You have to make sure that all relevant health care workers wear protective suites, masks, goggles, and what not, all the time. Yes, this is onerous; but it is the only way we know to prevent the spreading of pathogens within hospitals. It is a sad irony that patients may be and are indeed killed by diseases contracted in the place they went to in the hope and expectation to be healed.

We focus on Wuhan coronavirus, but we ignore basic protocols

So, here is the thing. For the time being, here in America no real threat from the mysterious Wuhan coronavirus, even though the spread of this novel disease is continuing, and therefore we should stay on the alert. This is relatively good news.

However, the ongoing and well documented tragedy of tens of thousands of Americans dying unnecessarily, year after year, because of carelessness and lack of proper hygiene in hospitals across America is a scandal that is essentially ignored.

We are unprepared for a major outbreak

Quite clearly, assuming that nothing or just a little will be done to improve the basic prevention/hygiene conditions within our hospitals, should we face a real health emergency like a virulent pandemic, we would be in real trouble.

Lacking adequate isolation facilities, overwhelmed “dirty” hospitals would become places of contagion, rather than cure. I really hope that all those in charge note all this and start taking action.

Given the state of most of our hospitals, we are not prepared to face a pandemic. Our national disease control policy cannot be just the hope of being lucky.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




Free Markets, Anybody?

By Paolo von Schirach –

WASHINGTON – Let’s be honest. The free markets that we learn about in school do not exist. They never did and never will. What we have instead are very imperfect approximations. What we have, at least in some parts of the Western world, is a declared intention to have a level playing field in which different corporations try their best to offer products and services, without enjoying any special advantages. For this purpose, governments established, (among others), antitrust authorities tasked with the goal of preserving free markets and fair competition.

Gaming the system

But this is an effort, a goal, an aspiration. In reality, most big corporate players do their very best to game the system in their favor. The dark secret of all true blue free market capitalists is that they all aspire to have and keep an impregnable rent position, whereby they will continue to dominate their market sector, hopefully for ever.

In pursuit of this anti-free market goal, US companies and trade associations spend larger and larger amounts of money on Washington, DC-based lobbyists whose only mission is to obtain, via legislation or specially designed regulations, set-asides, tax breaks, quotas, restrictions on imports, and whatever else may make it easier for their clients to protect their market positions and fend off competitors.

A semi-market

Therefore, what we have in America is a semi-market. In many ways there is competition, access and opportunity for new comers to come in and do their best to offer their products and services. But this system is quite imperfect.

And, again, the thriving, in fact almost monstrous, lobbying industry in Washington, DC illustrates how everybody, from dairy farmers to sugar growers, from the auto industry to the film industry, is trying to get special favors from Congress, the Executive Branch and all sorts of regulators, or prevent their competitors from getting them.

Europe pushing champions

That said, it seems that in Europe they are about to take this game up one level. Afraid of losing not just a few battles but the actual war on innovation and competitiveness, the Brussels-based European Union technocratic elites are now dreaming of creating EU Champions in leading tech sectors, (batteries for electric vehicles, telephony, artificial intelligence, robotics, you name it). This will be done by creating partnerships between the private sectors, national governments and EU institutions.

Well, this is a lot more than just lobbying. This is about openly subsidized new conglomerates created for the specific purpose or carving pieces of markets now occupied by American and increasingly Chinese tech giants.

Airbus worked

There is, of course, an illustrious (and remarkably successful) precedent to all this. And this is the Airbus consortium created back in 1970 by the Europeans to compete against America in the critical sector of passenger jets, and more. At the time, US companies dominated world markets. Europe had nothing.

If the intent was to carve a space for European companies, the notion of different companies in different European countries (France, Germany, Britain and Spain), enjoying varying degrees of state aid, being capable of designing, manufacturing, and selling state of the art jetliners for the global market seemed truly preposterous.

Indeed, many skeptics predicted that this Airbus consortium would turn out to be a gigantic waste of time and money. To begin with, the business model seemed most improbable, since it rested on the willingness and ability of various corporate entities located in different countries, with distinct agendas and corporate cultures, to successfully cooperate in a major effort aimed at designing, producing, and selling state of the art jetliners.

Success

Well, surprise! it worked. In fact it worked extremely well. Nowadays, Airbus is the undisputed number one or number two (depending on the year) manufacturer of jetliners. However, Airbus, especially in its early years, managed to survive because, beyond its now undisputed ability to make good airplanes, it enjoyed various subsidies. Could Airbus have survived without them, especially in the difficult early years? May be not.

Of course, Boeing, the US aerospace conglomerate that suffered the most on account of this new, well heeled competitor, cried foul. How can a US private sector company compete against a European conglomerate that benefits from various states aid, while its customers (the airlines) could obtain extremely generous finance terms for purchasing Airbus products?

The Airbus reply was that Boeing enjoys its own subsidies. It gets a lot of business from the US Defense Department. With those profits it can finance its civilian airliners sector.

However, even though there is some truth in the argument that Boeing is not a pure private sector company fighting against many competitors, it is absolutely clear that Airbus could not have been conceived without the massive state subsidies that gave the company the staying power (especially in its early years) it needed in order to consolidate its fragile market positions.

More subsidized consortia in the EU?

So, is the EU idea now to repeat the Airbus formula, extending it to different critical industrial sectors? Can this be done? Will it work? Well, it seems that this is the only idea that might work in Europe. The European private sector, (assuming we can talk about a EU-wide private sector), is just not capable of doing important, ground-breaking things on its own. And this reality has critical implications. Europe is already falling way behind in tech innovation. If nothing happens, the competitiveness war will be lost very soon. Europe will be an industrial backwater.

China, the emerging world economic power, does not have any problems pushing its own national champions, be they state owned enterprises, or nominally private enterprises, (think Huawei), that clearly enjoy special status as favored companies. Clearly China is not a market economy.

Free markets are an abstraction

Alright. The above tells us that truly free markets, with open and unfettered competition, are an abstraction. In varying degrees, everybody is exhibiting rent-seeking behavior. Everybody is trying to game the system via carve-outs, set-asides, protectionism, ad hoc regulations, and other non-tariff barriers in order to keep the competition out, or at least in a disadvantaged position.

More lobbyists in Washington, DC

Comparatively speaking, the US seems a bit better. However, do not expect the armies of Washington, DC lobbyists to disappear any time soon. If anything, they are becoming bigger, more sophisticated, and more expensive. And this is a worrisome trend. We preach free markets. Some politicians may actually believe in them. But corporations currently enjoying a dominant position are not really committed to this idea.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




US Will Soon Be The Number One LNG Exporter

Paolo von Schirach –

WASHINGTON – Energyindepth, www.energyindepth.org recently stated that the world is witnessing a major energy supply revolution. The United States, until a few years ago destined to become a major natural gas importer, is now slated to become the world’s number one exporter of Liquefied Natural Gas, LNG.

New geopolitics of energy

The website made this point also quoting the Executive Director of the International Energy Agency, a Paris-based group of major energy consumers: “The growth of U.S. natural gas production – led by increased shale production – has been transformative, not only domestically but globally. And it’s only the beginning. As IEA Executive Director Fatih Birol recently said:

“The second wave of the U.S. shale revolution is coming. It will see the United States account for 70 percent of the rise in global oil production and some 75 percent of the expansion in LNG trade over the next five years.  This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy.”

US as LNG exports leader

While the US is now the world leading oil producer, let us focus here on the vastly increased American LNG export capacity. New US LNG terminals have been completed, and additional ones will come on line very soon. As a result the US, already the world number three LNG exporter, (behind Qatar and Australia), in a few years will become number one.

While this is good for business, it is obvious that this new role of America as key energy supplier will have important geopolitical implications, as this surge in LNG exports is not just a temporary phenomenon. Indeed, the undeniable fact is that the world will rely on large amounts of natural gas for decades to come.

The world will continue to rely on gas

Realistically, it is clear that notwithstanding pledges to cut down the use of fossil fuels in order to combat global warming there is no way to achieve a rapid shift to non-carbon energy sources within the foreseeable future. It is just technically impossible. And it is also clear that affordable natural gas, used largely as electric power generation feed stock, is and will be the fuel of choice for many energy poor countries. Besides, it pollutes a lot less than coal. Therefore, from an environmental protection perspective, it is the least damaging among the fossil fuels.

Taking all this into account, the world will continue to rely on natural gas as feed stock for electric power generation, heating, and much more for decades.

Vast geopolitical implications

Of course, this sustained demand for gas is about new or expanding markets for the US energy business. However, it is obvious that there are and there will also be significant geopolitical implications. Indeed, US growing LNG exports will be a factor in reshaping commercial and political relations with many Asian countries and Europe.

New markets in Asia

For example, India desperately needs additional energy supplies for its energy starved population, now exceeding 1.3 billion. When it comes to electric power generation, India still largely relies on dirty coal, with horrible environmental repercussions in terms of staggering air pollution levels in most large urban areas. Switching over to natural gas is a necessity for India. The availability of increasing amounts of US LNG will make this transition away from coal a bit easier; while a new, robust energy trade will strengthen overall ties. Likewise, Japan and South Korea, traditional US allies and always net energy importers, also need gas. The opportunity to buy additional quantities of US LNG will strengthen the bonds with these two key Asian countries.

Of course, energy poor China could also be a major buyer of US LNG. But the political relationship between the US and China is bad, and not destined to improve any time soon. Therefore do not expect China to be a major buyer of US LNG. (China is focusing now on a significant increase of imported Russian gas, via new pipelines).

More LNG to Europe will counter Russian dominance

Another important market for US LNG will be Europe. All projections indicate that natural gas consumption in Europe will stay flat. However, European sources of natural gas (originating from Norway and The Netherlands), are dwindling, while much of Europe relies heavily on imported Russian natural gas supplied via a variety of pipelines, old (via Ukraine) and new (via the Baltic Sea). Some European countries see no problem in this significant energy dependence on Russia, while others feel uneasy, given the history of Russian meddling in Eastern Europe and beyond.

Given these geopolitical concerns, some European countries, most notably Poland and the Baltic States, look very favorably at the opportunity to diversify their natural gas imports by increasing US LNG purchases. For the time being, US LNG exports to Europe are modest, and so they do not shift the overall pattern of large purchases from Russia.

New flexibility

However, the very fact that several European buyers of Russian gas now have a new purchasing option –US LNG– that simply did not exist until a few years ago, gave flexibility and better bargaining power to the Europeans. As a result, Russia in many instances was forced to lower its prices, as a way to fend off US LNG competition. Going forward, as US LNG export capacity increases and the price differential between LNG and Russian piped gas shrinks, expect additional European purchases of US LNG.

Increased US influence around the world

All in all, the fact that the United States already is today –and will be even more so in the years to come– the leading, dependable exporter of liquefied natural gas, a vital, relatively clean, energy source, will increase American influence around the world, and will help strengthen political ties with key countries in Asia and in Europe.

Yankee Ingenuity

Not so bad overall, considering that this US natural gas (and oil) revolution originated out of the dogged persistence of a small band of American “frackers” who believed that oil and gas could be profitably extracted from shale formations, when all the energy experts and the big energy companies stated that it was absolutely impossible.

Three Cheers for Yankee Ingenuity!




Trump Takes U.S. Out of Paris Accord on Climate

WASHINGTON – U.S. coal miners and out of work factory workers: this is for you! President Donald Trump publicly announced that the U.S. will withdraw from the Paris Climate Accord that his Democratic predecessor, Barack Obama, promoted and warmly endorsed. Trump’s argument against the Paris deal is that it will penalize the American coal mining industry, and the overall American economy in the short term, with only vague hopes of somewhat lower world temperatures, way down the line.

Bad deal for America

As Trump sees it, this is a bad deal for America; and so the right thing is to get out of it. Sticking to the obligations created by the Accord would amount to enacting the equivalent of a huge energy tax on the US economy, because compliance with new, strict emission controls (in order to limit the amounts of greenhouse gases released into the atmosphere) will be very expensive.

As a candidate, Trump promised that he would withdraw from this climate deal, and now that he is President he is doing it. We know that his close advisers are divided on this issue. His daughter Ivanka and son in law Jared Kushner, along with Secretary of State Rex Tillerson, recommended not withdrawing. Still, in the end Trump sides with the opponents.

What does this mean? 

That said, from a practical standpoint, America’s exit, at least in the short term, will not amount to any worsening of the global climate. Indeed, the Paris Accord, if all goes well, promises only modest progress on lowering the temperature of the world, and only after many years. And this will happen only if we assume that all the other participants will actually do what they promised to do in terms of enacting new policies aimed at lowering their consumption of fossil fuels, this way reducing greenhouse gases emissions. Do keep in mind that the Paris Accord has no enforcement mechanism. The commitments made by the signatories are purely voluntary. In the case of China, the world’s biggest polluter, Beijing is theoretically bound to implement new policies several years from now.

Political consequences 

Still, Trump’s decision on this rather emotional issue has had immediate political consequences. From the stand point of other nations, particularly the leaders of the G 7 Trump just met in Taormina, Italy, this amounts to America choosing to go it alone, openly dissenting from a global consensus on the global threats to the earth created by the unrestrained consumption of fossil fuels.

U.S. no longer leading 

In the short and medium term, this means that America is no longer leading the world on a critical policy issue,  As most world leaders see it, America has now retreated in its narrow universe characterized by a bizarre anti-science fixation pursued by a strange president who is “anti everything”.

Anti-everything Trump

Indeed, Trump is so anti-immigrant and xenophobic that he wants to build a wall along the entire border with Mexico.

Furthermore, according to the now widely accepted narrative, this is a president who is openly against free trade, against the EU, against NATO, and against Muslims, (sort of). Given all this, Trump being also against joint international efforts aimed at stopping and hopefully reversing climate change is disappointing; but not surprising. This new development fits the now accepted narrative.

America is no longer leading. Trump’s America has retreated behind a myopic worldview of narrow self-interest.

From the standpoint of old friends and allies, Trump’s announcement on exiting the Paris Accord is yet another (sad) sign that America is no longer the “Leader of the free World”.

In fact, even before this new development on the Paris Accord, German Chancellor Angela Merkel had already publicly argued that it is time for Europe to think of and plan for a future without close ties to the U.S., since Trump’s America is no longer a reliable friend.

Political symbolism 

Again, keep in mind that all this is mostly about political symbolism. It will take four years for America to fully extricate itself from the obligations contracted under the Paris Accord. This is fairly long time. And again, keep in mind that under the terms of this Paris deal, major polluters like China and India have modest obligations when it comes to reducing their own emissions that will kick in much later. Which is to say that you should not expect world temperatures to start rising tomorrow, simply because today President Trump announced that America will pull out in four years.

No gain 

However, as indicated above, this decision is not without political consequences. In the end, all this is will amount to an additional loss of international prestige for Trump’s America.

With all this in mind, whatever you may think about the intrinsic policy value of the Paris Accord, it would have been better for Washington to be part of it, as opposed to becoming now a big pariah in the eyes of the world.

Trump is talking to his base 

Well, then why did he do it? Very simple.

Trump’s narrow concern here is to reassure his domestic political base –the millions of Americans who voted for him last November. This base includes out of work coal miners and people displaced by the closure of old manufacturing plants.

Trump’s message to them is that his job is to revive the American economy. If this means heavy reliance on dirty energy, so be it. Out of work factory workers want money to pay their bills. They do not care about the fate of polar bears or about extreme weather phenomena in Africa. And they do not care about rising sea levels.

Finally, dire scenarios of New York City and Miami under water in just a few years (because of the rapid melting of the Polar Caps) are definitely a hoax –at least according to Trump and his supporters.

 




The Dream Of New U.S. Manufacturing Jobs

WASHINGTON – We know that President Donald Trump pledged to renegotiate (supposedly unfair) trade agreements worldwide with the goal of re-balancing the U.S. trade accounts, while forcing companies to move lost U.S. jobs back to America.

Millions of jobs 

His narrative –accepted as truthful by millions of U.S. voters– is that America lost millions of jobs in the last couple of decades, while buying from China and Japan (among others) goods worth hundreds of billions, with no reciprocity, because incompetent U.S. trade negotiators (Democrats and Republicans) were so ineffective (in fact so stupid) that they allowed this disaster to happen.

Brand new trade deals 

According to the White House, the remedy is quite simple. You reopen old deals, get better terms through tough negotiations, and you force the offending countries (Mexico, Japan, China, South Korea, among others) to sell less to America, buy more from America, and spit back all the U.S. jobs that moved to their countries on account of badly conceived trade negotiations led by incompetent and unpatriotic Washington trade representatives.

Not that simple

If it were indeed so simple. The problem is that jobs are not akin to cash that can indeed be moved from one country to another in a matter of minutes. Regarding the loss of U.S. jobs, the fact is that in the last 20 to 30 years millions of U.S. manufacturing jobs moved to China because of China’s extremely low labor costs. At the time, this was a most compelling reason.

Cheap labor 

American and other Western companies, always seeking new ways to keep costs and therefore prices down, chose China as their base of manufacturing operations because China’s labor costs at the time were very low. Therefore, making industrial products in China –especially goods that required labor intensive operations– was comparatively quite cheap.

In a fiercely competitive global economy, all companies seek and want to take advantage of low production costs which allow them to sell at lower prices, this way undercutting their competitors.

All this happened in large measure because (after China joined the World Trade Organization, WTO, in 2001) the rest of the world accepted China as a member in good standing of the international economic and trading system.

No one seriously wanted to penalize made in China products because of the harsh working conditions in Chinese factories and China’s rock bottom wages. Was that a bad decision? Possibly. Still, be that as it may, the long term consequences of that decision, for all practical purposes, are irreversible.

Trade war and no new jobs 

A trade war with China, while the notion seems appealing to many, would cause a huge global crisis (you can expect retaliations and counter retaliations). And it would not produce the effect that President Trump would like to obtain: millions of jobs, now held by Chinese workers, “returning” to America, while America enjoys enhanced prosperity, and a positive trade balance.

And why is this impossible? In large measure this is due to the cumulative impact of China’s role as a global manufacturing hub. This enviable position led to the creation, over time, of complex supply chains that link Chinese factories, (and therefore Chinese workers), with a web of suppliers and vendors, within China and/or other countries in the region (Taiwan, Vietnam, Thailand, South Korea, and others). These sophisticated supply chains provide the components and semi-finished products that are finally assembled and completed in China. The finished goods are eventually shipped to the United States and other countries. 

This being the case, it is simply impossible, even if we assumed the unanimous will to do so, to yank the jobs now with  any Chinese factory which performs the final assembly of industrial products and move them to America.

You cannot recreate complex supply chains at will 

And here is why. For this “operation” to be successful, one would have to move and/or recreate –from scratch– in America the entire supply chain that now supports that particular Chinese factory. And this would require the creation, here in America –again, from scratch– of fine tuned business relationships between the lead manufacturer and a brand new network of U.S. suppliers and vendors based on their proven ability to perform at the level required (quality, standards, specifications, delivery time) and at costs low enough to guarantee the competitiveness of the made in America finished product.

No U.S. companies operating in many sectors 

If this were not enough, given the lack of meaningful industrial activity in many of the manufacturing sectors that moved to China or elsewhere decades ago, many of the needed suppliers that would be part of the brand new U.S. based supply chain simply do not exist anymore. They went out of business. How about that. No companies making the necessary components, no supply chain.

Impossible

From all of the above, you can see that the idea of transplanting complex networks of companies, working in harmony with one another, from China to the U.S. is an impossibility.

Again, let me stress that those supply chains were not improvised in China a couple of weeks ago. They were created over decades of tests, trials and error. The notion that the entire web of complex business relationships now at the core of Chinese manufacturing can simply be dismantled and transported to the U.S. is a childish fantasy.

An additional problem: automation 

And if this were not enough, you have to consider automation, a relatively recent development which did not play a significant role at the time of the jobs migration incentivised by low Chinese labor costs.

Keep in mind that automation has nothing to do with unfair trade practices. But it has the practical effect of killing U.S. factory jobs that used to be performed by humans. This is an unstoppable trend. Yes, the robots do many and in the future most of the jobs that factory workers used to do.

In a relatively short time, tomorrow’s modern factory will probably be completely automated, with only a few highly specialized IT experts and engineers in charge of supervising the robots, and the overall production schedule.

Which is to say that, even if we assume that some manufacturing activities would “return” to America and/or new ones are created on U.S. soil, not much will change in terms of net new employment in manufacturing. In a best case scenario, may be some factories will come back. But most of the workers who used to be employed in that sector will be replaced by automation.

We are in a new era 

Keep in mind that now we are in a new era; an era in which humans will do less and less factory work. As robots now and in the future will do most of the work, labor costs will become less and less of an issue in determining the location of new industrial plants. Still, as tomorrow’s factories will be even more automated, it is hard to see net gains in manufacturing jobs in America, or in the rest of the high cost western world, for that matter.

No jobs coming back 

In conclusion, here is the thing. The creation of complex supply chains created by Chinese companies to support China-based production over many decades cannot be dismantled and quickly reassembled at will here in America.

Furthermore, from now on automation is and will be the new manufacturing jobs killer. While automation, at least in some areas, may result in creating new forms of employment in new sectors that we cannot even think about today, the old factory jobs we used to know at some point will become extinct.

Can we do anything to reduce the trade deficit with China?

That, said, what about the chronic trade imbalance with China? Very hard to do this. And this is in large measure due to the fact that millions of American consumers love to buy cheap consumer goods. And China, for the moment at least, is still the low-cost producer.

However, what can and should change in this enormously large bilateral trade relationship is the unfair treatment of foreign companies trying to establish themselves in China, or trying to sell their products and services to China.

Unfair treatment 

There is plenty of evidence indicating that U.S. exporters are penalized in a variety of ways. For instance, the Chinese use their own competition laws as an effective non tariff barrier against foreign companies. Chinese authorities selectively target U.S. and foreign companies accusing them of anti-competitive behavior, forcing them to pay fines and to license their technologies to Chinese entities, this way undermining their ability to work in China  and their overall competitiveness.

Demand better terms 

This is an area where the Trump administration has legitimate ground to complain and demand better terms from China. Still, even if successful, this effort would lead at best to the narrowing of the trade imbalance gap, not to its disappearance.

As for the millions of new manufacturing jobs coming back to America on account of broad new trade agreements, well, dream on. This is just not going to happen.




The Obama Foreign Policy Record

WASHINGTON – The almost universally accepted narrative dished out daily by the serious, high brow U.S. media is that come January 20, 2017, with Donald Trump as President, we shall have 4 years of “Amateur Hour” in U.S. foreign policy. This dismal prospect is of course a far cry from the thoughtful, insightful and properly balanced foreign policy agenda expertly crafted and implemented by President Barack Obama and his top-notch foreign and national security policy team.

The incompetents are taking over

We are told by savvy analysts that, all of sudden, from reliable, steady competence that  –as we all should know– raised American prestige worldwide, we shall plunge into an abyss of policy mayhem stirred by dangerous ignorance mixed with laughable (or dangerous) braggadocio, with a stupendously unqualified Commander in Chief at the helm.

Condescension 

This narrative is another expression of the Olympian condescension of the perennially entitled leaders of the Washington foreign affairs establishment. They simply cannot get used to the reality of a complete outsider, with no real hands-on experience in this field until now reserved to few insiders, now in charge.

Trump is inexperienced  

True, Trump is inexperienced. He may indeed fail in foreign policy, and we should not take this prospect lightly, as there are bound to be consequences. On the other hand, he may not fail, after all. Trump will have a team working for him. Most of the people he picked thus far have considerable international and national security experience.

Right mix? 

That said, has he chosen the right mix of people? Even more important, when confronted with difficult decisions, in murky situations when there is no obvious right policy choice, will Trump have the right instincts? Will he manage to safeguard –better yet, advance–  the American National Interest? Quite frankly, we do not know yet. Time will tell.

Obama’s record

However, while we can only speculate about the future, we do know a great deal about the Obama Team foreign policy record. And, no, it is not stellar. Contrary to the official narrative, the supposedly expert hands that have been in charge until now are not shining stars. And Obama is no great leader when it comes to directing U.S. foreign affairs. Hesitation, mixed messages and retreat have defined American foreign policy under his stewardship.

Now, after George W. Bush’s profoundly ill-advised pro-democracy enthusiasm which led America into two horrendously costly and mostly unsuccessful wars –Afghanistan and then Iraq–  a new foreign policy guided by restraint was indeed a welcome change after the 2008 elections. But there is a huge distinction between careful, calculated withdrawal behind defensible lines, while spelling out U.S. continuing strategic priorities, and policy confusion leading to retreat.

Allowing chaos in Iraq

In Iraq, President Barack Obama used Baghdad’s intransigence regarding the legal status of U.S. troops which would stay on after December 2011 as a good excuse for ending the negotiation with then Prime Minister Nuri al-Maliki. With no deal with Baghdad in place, the U.S. pulled completely out of Iraq at the end of 2011.

At that time Iraq was a relatively stable but still fragile and politically split country (Sunni in the North, Shia in the South) in which America had invested an enormous amount of resources. Pulling out completely while the wounds had not healed was an ill-advised and in the end horribly wrong decision.

To this day, President Obama claims he had no choice, given the uncooperative stance of the Baghdad government. But this is nonsense. If the Obama administration really wanted a deal with Prime Minister al-Maliki that would have allowed a substantial U.S. military presence after 2011 it would have found a way to get one.

Get out

The fact is that Obama wanted out of Iraq, entirely for domestic political reasons. He wanted out of Iraq in order to show to the American people that he had made good on a major campaign promise: he had brought all the troops home. And, in fact, later on he repeatedly bragged about this “accomplishment” represented by the closing of the Iraq War chapter. Which is to say that concerns about Obama’s popularity at home caused America to essentially abandon a country in which it had invested years, hundreds of billions, and so many lives of killed U.S. soldiers.

Could sizable American troops stationed in Iraq have prevented the steady descent into chaos that followed their departure? We do not know for sure. But it is not far-fetched to believe that they could have helped keep things together.

Belated U-turn in 2014 

That said, Obama was forced to make a complete U-Turn on Iraq when this deeply divided country was confronted with an invasion masterminded in 2014 by the Islamic State, or ISIL from its bases in Eastern Syria. A massive invasion, by the way, that the sophisticated Obama intelligence leaders never saw coming.

With no U.S. troops on the ground, (thanks to Obama’s complete troops withdrawal decided back in December 2011), ISIL breezed, mostly unopposed, into Northern Iraq. In a matter of days it took over Mosul –the second largest city in the country– and the entire North West of Iraq. An eyewitness quoted by The Guardian said that:

“The city [Mosul] fell like a plane without an engine. They [ISIL] were firing their weapons into the air, but no one was shooting at them.”

Beyond taking over Mosul, ISIL captured vast amounts of cash and a huge arsenal of U.S. supplied weapons and material, simply because the Iraqi troops had run away.

So, here is the upshot regarding Obama’s record on Iraq: U.S. troops out; ISIL in. The Caliphate takes over 1/3 of the country within days. America forced to move back in. But slowly and with hesitation. Meanwhile, militias funded by Iran spread through the country. This is complete policy failure.

Surge in Afghanistan? 

In Afghanistan, President Obama started with an almost comical public debate in the Fall of 2009 (first year of his mandate) about what U.S. policy should be regarding the continuing Taliban insurgency. Obama finally ended the deliberations in November 2009 with a commitment to a “Iraq-like” surge in Afghanistan. But it was a surge accompanied by a publicly announced withdrawal timetable.

Yes it was just like that. Washington would send additional troops aimed at stabilizing this perennially chaotic country; but only for a short while. How ill-advised. You go to war not to shoot around a little bit, and then go home. You go to war to win. Or you do not go at all. Result? 20016 is over and the war in Afghanistan is still going on. This is another failure due to Washington’s indecisiveness and half measures.

Get rid of Ghaddafi 

Then there was Libya, and the ill-conceived idea of toppling dictator Ghaddafi, without even a thought of a game plan about what to do afterwards. Result? Ghaddafi was toppled and he is certainly dead. But so is Libya, now a failed state torn apart by various warring militias. This is failure number three.

Hesitation about Syria 

And what about Syria? in 2011, at the beginning of the Arab Spring, President Obama declared that President Assad heavy-handed repression of initially peaceful pro-democracy demonstrations was intolerable. Assad, Obama declared, “had to go”.

Strong words. However, this clear statement of a U.S. policy objective –nothing but regime change would do for Syria– lacked even the semblance of a policy aimed at obtaining the outcome: make Assad go.

This incoherence between grandiose objectives and no policy to implement them was only the beginning of a half-hearted U.S. policy in support of some factions within the Syrian opposition.

Military planners should know that a little bit of support is not enough. In war, either you are in or you are out. Even if your method is to support the opposition, as opposed to sending your own troops, you have to be with them all the way. Support to your side in the conflict has to be decisive. The objective must be victory.

Media criticism 

Well, even the serious usually pro-Obama media, after years of U.S. half measures, recognized that Syria is a huge policy failure for Obama. this is a BBC analysis dated October 2015:

“[Regarding Syria] the philosophical discussion at the White House was heated and fierce, leading to stalemate, not resolution.

For years Obama and his deputies refused to say categorically: we’re not doing this. Instead a decision was postponed.

Four years later, the result is a splintered Syrian opposition, the growth of the Islamic State group and a humanitarian disaster stretching across Europe.

Last year, in a move that was more symbolic than serious, Obama asked Congress for money to fund a programme allowing US personnel to teach rebels marksmanship, navigation and other skills.

The goal was to train about 15,000 rebels in Jordan and other countries so they could return to Syria and fight. However, US defence officials admitted last month [September 2015] that only four or five of the recruits in the programme had actually returned to the battle.”

It ended badly

And this was the BBC, a fairly sympathetic voice. A year later, things got only worse. The result of years of U.S. policy confusion and half measures is a semi-destroyed Syria, Russian massive intervention in support of Assad, the Iranians and Hezbollah firmly planted there, a defeated opposition just driven out of Aleppo, not to mention untold numbers of dead people and millions of refugees. And now, a new ceasefire was arranged by Russia in partnership with Turkey and Iran. The U.S. is not even at the table. Talk about American retreat. This is a colossal policy failure.

ISIL in Iraq 

And then there is ISIL in Iraq, the worst consequence of the U.S. total military withdrawal from the country it had invaded back in March of 2003. In a speech to the Nation, on September 10, 2014, President Obama sounded really tough about ISIL and the threat that it represented for the region and indeed the world.

He declared that:“Our objective is clear: we will degrade, and ultimately destroy, ISIL through a comprehensive and sustained counter-terrorism strategy”.

It sounded that America really meant business. To begin with, Obama told the world that Washington had assembled a powerful coalition of 66 countries. Impressive? Not so much. If you care to dig just a little bit, you discover that this unbeatable anti-ISIL Armada includes heavyweights like Luxembourg, Somalia, Iceland, Bosnia, Bahrain, Romania, Cyprus, Estonia, Panama, Montenegro, Latvia and Albania. Are you still impressed?

Painfully slow progress 

And the American military effort has also been modest. Two years later, while there have been significant successes against ISIL, we are still not done. Coalition supported Iraqi forces, (by the way this would also include support from Iran) are getting closer to Mosul; but they are still far from retaking it and eventually driving ISIL out of Iraq, let alone “destroying” it, as Obama pledged.

This is almost inconceivable. ISIL is a bunch of nasty thugs who use barbaric methods. But ISIL is not the German Wehrmacht smashing France, or the Japanese Imperial Army conquering Manchuria or the Philippines. It is a rag-tag, third-rate military force. it is unbelievable that America, with the largest and most technologically advanced military force in the world, could not destroy the self-proclaimed Islamic Caliphate in a matter of weeks.

To the contrary, a recent Washington Post story indicated that this battle against ISIL is going to be long slug:

“.[…].But a full offensive to retake the city [of Raqqa, de facto capital of ISIL] could still be months or more away, despite hopes in Washington that an operation to take the Islamic State’s most symbolically significant stronghold would be well underway before President Obama left office.”

This slow and uneven progress is the military outcome of policy confusion and partial military engagement. Despite Obama’s clear commitment a couple of year ago, the mighty U.S. still has not managed to “degrade and ultimately destroy ISIL”.  

Pivot to Asia? 

And there are many more examples of grand plans that yielded little. Consider the pivot to Asia. Nice idea; but little to show in terms of results. Suffice to say that China, just as America publicly committed to shift its policy focus on Asia, has managed to increase its sphere of influence throughout most of the South China Sea –essentially unchallenged.

True, the Obama administration made all the right noises when confronted with the evidence that China is busy building up and militarizing small islands scattered across the South China Sea that it occupied with the bogus justification that these rocks (some of which do not even qualify as “land” according to international law) have always been under Chinese sovereignty.

The Obama administration has not been able to challenge this creeping Chinese expansion, nor has it been capable or willing to persuade the Chinese to retreat and get out.

Iran

I am purposely leaving out of this analysis the Iran nuclear deal, because it is a lot more complicated than these other issues, and because in Iran’s case the Obama administration acted with purpose towards a fairly clear policy objective: freeze the Iranian nuclear program. And this objective has been reached. While there are many vocal critics of the deal, none of them seem to have a better plan. Just getting out of a “bad deal” without having anything to replace it will not yield better outcomes.

Obama’s retreat 

Anyway, you get the picture. Clearly, it is always easy to point out foreign policy failures with the benefit of hindsight.  Of course, it would be completely unfair to blame Obama for an Arab World in chaos, and other major troubles.

Still, the net result of Obama’s 8 years in office is not stellar.

All in all, U.S. policies regarding Iraq, Afghanistan, Libya, Syria and ISIL reveal a pattern of hesitation, in fact genuine confusion, and the inability to define, articulate and pursue what in Obama’s mind is the U.S. national interest.

What U.S. retreat signals to the world 

It would be disingenuous to conclude that all these failures, mixed messages and retreats from the world stage do not matter, because America after all is still the most powerful country on earth.

It is obvious that other political leaders around the world look at both American military capabilities and American political will. If they conclude that America lost its will, its powerful military forces will not deter as much as they used to.

Will Trump be better? 

In the end, it is perfectly alright to express doubts about President-elect Trump ability to articulate a mature U.S. foreign policy. Still, the idea that come January 20 2017 the rowdy, clueless children are taking over, while the thoughtful grown ups have been driven out of the room is nonsense.

Quite frankly, if the poor Obama foreign policy record is the best the mature and experienced adults are capable of, then we may as well give the untested Trump and his team a chance.

Who knows, they may surprise us.